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What Is a Tax Haven?

  • VOA News

The website of the Mossack Fonseca law firm appears through a large format lens in Bad Honnef, Germany, April 4, 2016.

The website of the Mossack Fonseca law firm appears through a large format lens in Bad Honnef, Germany, April 4, 2016.

The International Consortium of Investigative Journalists, working with more than 11.5 million leaked documents from a Panamanian law firm, in early April published some of its findings into the offshore financial dealings of the rich and famous.

The ICIJ analysis of the documents, known as the Panama Papers, showed the firm Mossack Fonseca helped thousands of individuals and companies from around the world set up shell companies and offshore accounts in low-tax havens. Such accounts are a favored tool to evade taxes, launder money or pay bribes, though they also have legitimate uses.

Tax haven: A country or jurisdiction in which foreign individuals or countries can take advantage of policies that provide little or no tax liability, allowing them to avoid paying at least some taxes in their home country. Other terms are secrecy jurisdiction or offshore haven.

Characteristics:

  • Laws encourage financial secrecy and inhibit free exchange of information to foreign taxing officials.
  • Lack of transparency in legal and administrative dealings.
  • To requirement that a person live in or a business operate out of the host country in order to benefit from its tax policies.
  • Legality: It's legal for a country to function as a tax haven – in other words, to offer low taxes and high privacy – or for a company to move offshore to lower its taxes.

But it's illegal for a person or business to fail to report income from accounts in foreign countries if required by the taxpayer's national taxing authority, or if an offshore financial institution is used for illicit purposes, such as money laundering and tax evasion.

Offshore: To register or operate outside a person's or business' national boundary. The arrangement often provides financial, legal and/or taxation benefits.

Offshore company: A firm, also known as a shell company, that's incorporated for the purpose of operating outside the country of its registration.

Tax avoidance vs. tax evasion: Tax avoidance allows a person or business to legally lower the amount of income tax owed by claiming permissible deductions and credits. Tax evasion is illegal because it allows a person or business to intentionally avoid paying taxes.

Well-known tax havens: the Bahamas, Bermuda, British Virgin Islands, Cayman Islands, Isle of Man, Luxembourg, Mauritius, Panama, Switzerland, as well as the U.S. states of Delaware and Nevada.

Sources: Investopedia, Business Dictionary, Citizens for Tax Justice, Unitrust Capital Corp., AP, the Motley Fool, Investing Answers

WATCH: Panama Tax Haven Revelations Show How Neediest Nations Are Harmed

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